By the close on Wednesday, the S&P 500 index had retraced somewhat but still remained near historical highs. After the significant rate cut by the Federal Reserve, investors have plenty of reason to expect it to set new highs again.

It has been a while since this index has shown such a robust performance for consecutive years. According to Dow Jones market data, the last time this happened was in 1998.

Back then, the surge in public enthusiasm for stock trading and the hype around the internet fueled a stock market boom. The S&P 500 index rose 20% or more for four consecutive years starting in 1995, with the strong momentum almost extending to the subsequent fifth year, when the index rose 19.5% in 1999.

Prior to this, it was unheard of for U.S. stocks to see such strong back-to-back years of growth since 1955, even before the inception of the S&P 500 index.

The strong upward momentum in the stock market will reignite speculation about how much upside potential remains, and whether this impressive bull market may slow down or even reverse. According to FactSet data, the S&P 500 index has risen 60% since its low point in October 2022.

Some people suggest completely giving up large cap stocks and instead trading better in the mid-small cap sector, even buying foreign stocks on dips.

But others insist that large cap stocks are still the best choice for investors, even though their valuations have reached relatively high levels compared to recent history.

Comparison with the Internet bubble era

Drawing parallels between the current state of the American stock market and the Internet bubble era is not necessarily a strong reason. Wall Street professionals quickly pointed out the similarities and differences between now and then.

Interactive Brokers' Chief Strategy Officer Steve Sosnick said in an interview on Wednesday: "The last time we saw such performance in the U.S. stock market was in the late 1990s. But I don't want to draw excessive comparisons to the Internet era, because that may not be fair, but what I want to say is, that was also the era when the public fell in love with stocks. So, you know, they really were willing to put money into the market."

Just like then and now, technology stocks dominate the market. Yardeni Research's Chief Market Strategist Eric Wallerstein stated that information technology and communications services (successors to the telecommunications industry) together account for a significant portion of the market cap of the S&P 500 index.

According to FactSet data, based on the ratio of stock trading to company sales, the S&P 500 index is even more expensive than back then. As of the end of August, the forward price-to-sales ratio for the index was 2.9 times, compared to 2.4 times at the end of 1999.

However, the biggest American companies today are more profitable than back then, meaning that prices are actually lower relative to expected future earnings.

According to Wall Street's profit forecasts for the next year, the recent expected pe of the s&p 500 index is 21.6 times, while the expected pe at the end of 1999 was slightly below 24 times.

Is high valuation not a problem?

Sosnick stated that although company management teams find it difficult to manipulate prices and sales indicators, ultimately, profit is the most important for investors.

Nevertheless, some people on Wall Street believe that high valuation may set the stage for below-average returns for the s&p 500 index over the next decade.

Earlier this month, several analysts at jpmorgan warned that, according to their models, the average roi of the s&p 500 index over the next decade will shrink to 5.7%. According to dow jones data, this is lower than the average annual roi of 8.5% since the s&p 500 index was introduced in 1957.

On the other hand, Wallerstein and his colleagues at Yardeni Research believe that the earnings and returns of the s&p 500 index will be supported by higher-than-expected economic growth at least until 2030.

The improvement in productivity should help expand the profit margins of large companies, which in turn will help drive the stock market to rise at a pace higher than the average.

"I think one reason valuations are currently and will be higher in the future is that the weight of the seven giants, namely information technology and communications services in the market, is increasing," Wallerstein said in an interview. "We won't ignore the valuation argument, but this argument may have been overused in the past 15 years."

The market breadth is expanding.

This does not mean that tech stocks and tech-related stocks will continue to dominate the market as they did in 2023 and early 2024. In fact, since the beginning of the third quarter, this situation has already begun to change.

Wallerstein stated that he sees plenty of signs that other large-cap stocks have started to make a bigger contribution. Data shows that financials, industrials, and utilities are approaching their best quarterly performance since 2003, as long as these previously lagging sectors continue to rise, there is a lot of room for the S&P 500 index to continue its rapid ascent.

History also indicates that good days for the US stock market can continue, although the pace of increase may slow down. According to Dow Jones data, since 1957, the S&P 500 index has seen an average increase slightly above 9% in the year following a 20% rise.